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Speech by Rt Hon Sir Mekere Morauta, Kt MP Prime Minister and Treasurer On the occasion of the presentation of the 2002 Budget to Parliament

From Reconstruction to Development

From Reconstruction to Development

Mr Speaker, Honourable Members, People of Papua New Guinea,

This is the final Budget of the Sixth National Parliament. It consolidates the hard won gains of my Government's economic, social and political reforms. It strengthens our policy and institutional framework. It provides a platform for long-term growth and development.

In this budget, we harvest the first fruits of the new seed we were able to sow during the last 30 months. After recovery from the economic disaster we inherited, we can now provide some immediate benefits to our people.

Budget Benefits

For Workers

From 1 January 2002, all workers will pay less tax. 5,000 more taxpayers will join the 10,000 exempted from tax this year.

For Families

Primary and secondary education will be free. No child in government or church schools will pay tuition fees. These will be paid for by the National Government. We can afford to do so, because of the success of our privatisation and reform program to date.

For Farmers

In a time of low international prices for our tree crop exports, farmers deserve support from the Government. We all know that a healthy agricultural sector is vital, as it alone provides income for the vast majority of our people.

In 2002, K30 million will be budgeted to support the coffee and copra industries, with K20 million to be disbursed in the first half of the year.

In addition, K24.7 million will be spent on an agro-industry development project over the next two years. This project is co-funded by the Asian Development Bank, the Government and the private sector, and K10 million will be spent in 2002. Its aim is to strengthen the profitable partnership between smallholders and professionally managed agro-businesses.

The benefits to rural people from both of these projects will be considerable, through increased incomes and improved access to basic services.


Mr Speaker, in 2002 development spending will again be a record, at K1.2 billion. This expenditure will benefit every Papua New Guinean, most especially disadvantaged rural people.

It will mean more classrooms and teacher housing. It will mean more aid posts and other infrastructure that promotes human development and improves our quality of life. It will mean better roads and bridges.

Maintenance and Improvements to Infrastructure

Preparatory work has begun on maintenance of the Highlands, Magi, Hiritano and Buluminski Highways. Cabinet has approved contracts for the upgrading of six major provincial roads in Madang, Sandaun and Western Highlands provinces.

Under the 2002 Budget, the pace of maintenance and extension of critical roads and highways that make travel easier and economic activity more profitable will accelerate.

My Government has decided to set up a National Roads Authority to oversee the planning, design, construction and maintenance of major assets, principally national roads. K1 million has been allocated to set up the Authority next year. The main role of this body will be to assemble and manage the necessary resources and undertake maintenance of infrastructure in a co-ordinated way. Legislation setting up the Authority will be presented to the next session of Parliament.

For Women

Mr Speaker, my Government acknowledges the important contribution by women in nation building. An additional amount of K1 million has been allocated in the 2002 Budget to women's affairs.

Economic Conditions

Mr Speaker, these are just some of the highlights of the 2002 Budget.

These new initiatives have become affordable because the fundamentals that directly affect our daily lives have improved greatly during the past 30 months through sound fiscal and economic management by my Government.

Interest rates have fallen by around 64 per cent, spurred by my Government's program of reduction of its debt to domestic financial institutions, reduced expenditure, reduced commercial borrowing and attack on inflation. In 1999 the interest rate on 182-day Treasury Bills reached over 28 per cent. The rate is now 10.16 per cent.

Inflation has also fallen by around 64 per cent. The rate of inflation over the 12 months to June 2001 was 7.9 per cent. For the corresponding period the year before it was 21.8 per cent.

For two and a half years the Kina has traded in a stable range. Careful management has prevented the precipitous falls and volatility experienced between the middle of 1997 and the middle of 1999. Under my Government the Kina has broadly held its value against important currencies such as the United States and Australian dollars and the Japanese yen.

This has not been easy, with the international economic environment now in worse condition than at any time since our Independence. A more stable Kina has been a valuable support to economic and business stability through difficult times.

Reserves of foreign currency have increased more than fourfold. When my Government took office there was only US$89 million in the coffers. Foreign exchange reserves are now US$368.5 million.

Mr Speaker, these achievements have been made in the face of extraordinary adversity. When my Government came to power in July 1999, the nation was facing bankruptcy. Why? Because of the reckless, uncaring and incompetent policies of the previous Government.

Our institutions of state had been plundered and left shattered and demoralised.

Things got so bad that investors and formerly friendly governments and international institutions were turning their backs on Papua New Guinea. Our political system had reached the point of paralysis: party politics, cronyism and blatant self-interest meant elected governments could not govern efficiently or fairly.

Our fiscal, economic and financial management had become a scandal at home and overseas.

Mr Speaker, it is important that we do not forget the terrible state we were in, so that we never, ever return to it. In the difficult times that we face, it is doubly important that we do not forget.

Economic Prospects

In the 2002 Budget, we will continue to apply the nation's resources to promote sustainable growth and development over the longer term. For the last two and a half years we have worked hard to clean the terrible mess we inherited. As you have heard me say before, the weeds must be rooted out of the garden before crops can be sown and grow.

By the end of this Parliament, we will have a much cleaner garden in which to sow the seeds of development. Let us not allow the weeds to sprout again.

We face many economic challenges in the coming year.

Mining and petroleum production is projected to decline. This will lead to lower revenues and lower foreign exchange earnings from these sectors. International prices for our agricultural products have fallen significantly and for some there is no expectation of a near-term turnaround.

The world economy was facing difficulties prior to September 11 this year. Since the terrorist attacks on the USA, the outlook has worsened considerably. No one yet knows how serious the downturn will be in the USA and Japan, the world's biggest economies. Many of our neighbours, especially in Asia, face deep recession.

It is therefore essential that a small economy such as ours continues to focus on good economic and financial management so that we can withstand the threats that the global downturn poses.

Despite the progress we have made since July 1999, we remain vulnerable. It would be a disaster if we turned our backs on two and a half years of struggle to create a prosperous future by seeking an easy way out.

Mr Speaker, there are no easy ways out. For development to occur we must keep to the vision and objectives we set as a nation when we made our date with destiny in July 1999.

Budget Framework

The 2002 Budget addresses all of our challenges responsibly.

The relief measures and initiatives we have been able to provide have not come from the incompetent and irresponsible policies that were the hallmark of the previous government. They have not come through new revenue measures. Mr Speaker, as with my two past Budgets, there are no new taxes in 2002. In fact, in 2002, we are giving away K50.6 million in the form of reduced taxes.

Our budget initiatives are affordable. They are justifiable. They are responsible. They are needed. The Government is not indulging in the type of wishful thinking that typified the last administration.

The underlying assumptions of the Budget are realistic. They are: real GDP growth of 1.2 per cent, an inflation rate of 8.3 per cent, an interest rate on 182-day Treasury Bills of 10 per cent, a gold price of $US285 an ounce and an oil price of $US23.50 a barrel.

Fiscal Strategy

The fiscal strategy of the 2002 Budget is designed to achieve the following aims:

To maintain a stable exchange rate and to continue to reduce inflation;

To increase efficiency in the use of public funds through public sector reform and debt restructuring;

To increase the development impact of the National Budget by focusing expenditure on priority areas, increasing the level of service delivery, and privatising functions that can be carried out best by non-government and private-sector organisations;

To continue to remove obstacles to investment and growth.

Finally, and underpinning everything else, this Budget will do all of these things while lifting some of the financial burdens from Papua New Guineans who cannot afford to carry them.

Maintaining Stability

The first objective of the Budget will be achieved by maintaining a moderate Budget deficit despite the highly adverse international conditions and ensuring that the Budget is financed in a way that does not exert pressures on the domestic financial system.

Members will recall how the special "Last Chance" Supplementary Budget of August 1999 turned around a runaway budget to achieve a more reasonable outcome for that year. The 2000 and 2001 Budgets achieved responsible outcomes. This budget continues the record of moderate budget deficits under my Government.

Mr Speaker, for 2002 the Government is targeting a deficit of K214.5 million, which equates to 2 per cent of GDP. Taking away arrears payments of K16 million and K87 million of one-off Structural Reform Program Expenditure, the underlying deficit is 1 per cent of GDP. This outcome has required, and represents, great restraint in an election year, with total expenditures and net lending growing at 6 per cent in nominal terms from K3.3 billion to K3.5 billion.

Continuation of the Government's debt reduction programme will contribute to the stabilisation of the exchange rate and further reduction of interest rates and inflation.

Total Budget Outlays

Total outlays for 2002 are set at K4.27 billion, an increase of K144 million over 2001.

Recurrent Expenditure

Recurrent spending is set at K2.3 billion, a modest K71 million increase over 2001. The tight rein kept on the recurrent budget is reflected in the allocation for goods and services for National Government departments of K472.5 million, a reduction of K69 million over this year.

For 2002, the free education program and funding for church health services will be administered by National Departments. As a result of this transfer, expenditure on goods and services for provinces will fall by K34 million.

Sadly, Mr Speaker, in the past not all provincial governments passed these grants on to schools and health centres. In 2002, all schools and church health facilities will be guaranteed payment of their share, and receive it on time.

Development Expenditure

The allocation that has the greatest impact on our citizens, Mr Speaker, is the Development Budget.

The record outlay of K1.16 billion reflects a projected rise in donor grants and concessional loans. Development expenditure in 2002 is 35 per cent of total revenue and grants, compared with the projected outcome of 33 per cent in 2001.

An important change for 2002 is the decision to abolish the District Development Program grants of K89 million. Mr Speaker, the District Development Program has been a source of genuine concern in the community, especially in relation to issues of accountability and the real development impact of the expenditure. Almost nobody will mourn its passing. It will be celebrated. Our decision reflects public opinion and as the people's representatives, we will be judged to have made a responsible decision.

In 2002, the distribution of the Development Budget will continue to be based on the Government's priorities of basic education and primary health care; transport infrastructure maintenance; law and order; and primary industry.

On a sectoral basis, 44 per cent of the 2002 Public Investment Program will be allocated to infrastructure, 28 per cent to the social sector, 17 per cent to the economic sector, 6 per cent to law and justice and 5 per cent for administration.

Infrastructure has been allocated K511.3 million, an increase of K16.3 million over the revised level for 2001. The social sector has been allocated K322.7 million, an increase of K73.6 million. The allocation to the economic sector is K195.3 million, an increase of K20.6 million; and the law and justice sector will receive K67.8 million, an increase of K22.3 million.


Mr Speaker, total revenues and grants for 2002 are estimated at K3.3 billion, a 5.2 per cent increase over 2001.

Tax revenue is expected to increase by 4.1 per cent, or K96 million, to K2.416 billion in 2002. Greater collections are expected from stricter auditing and higher compliance.

VAT revenue is projected to rise by K66 million, or 28 per cent, through new enforcement measures and lower refunds.

The high level of funding for the Internal Revenue Commission will continue in this Budget, and will be backed up by legislative initiatives to ensure better compliance.

Consumers will also be pleased that we are legislating for stricter rules regarding the way some storekeepers and service providers have been advertising prices. People have complained that goods or services are advertised at prices lower than their real cost, as the VAT component is excluded. Thus when they come to pay, they find that the cost is higher than that advertised. From now on, all prices advertised must be inclusive of VAT.

Main Fiscal Measures

Mr Speaker, the challenge for fiscal policy is to preserve macroeconomic stability while ensuring an expenditure program that immediately improves our quality of life and promotes long-term prosperity.

The relief measures and initiatives I am announcing today have been carefully crafted to do both.

Education Subsidy

In particular, Mr Speaker, I am sure all Papua New Guineans welcome my Government's decision to give our children a better future by providing free primary and secondary education.

Free education is a key policy of PDM. When we were in Government before, we introduced free education. When we were not in Government, school fees were reintroduced. Opposition Parties are already saying that should they come to power after the election next year, free education will be abolished.

Under our program, there will be no tuition fees. The Government will from next year pay the fees currently set by the National Education Board. Parents will be able to look forward to the 2002 school year with confidence that their children will not be turned away because they have no money to pay school fees.

The Government subsidy for education in 2002 will be K150 million. Schools will receive their share of this money directly.

The Government can afford to increase the fee subsidy from K61 million to K150 million, because of the success of our privatisation and economic reform policies. Privatisation is necessary for development, because it will mean cheaper and more reliable services. It will help us pay our debt. It will free up financial resources for education, health, and all the other things that Government should be spending its money on.

Members should regard this initiative as a milestone in the development of our country. Access to primary education is the right of every Papua New Guinean child.

Income Tax Cuts

Mr Speaker, in the 2001 Budget my Government reduced income taxes across the board. Today, the burden on workers will be further lightened.

It pleases me to announce that the tax-free threshold will be raised from K5500 to K6000. 5000 workers who now pay tax will pay none next year. This year we lifted the threshold from K4500 to K5500, exempting 10000 workers from income tax. Raising the threshold to K6000 means that 15000 workers who had to pay tax in 2000, will pay no tax in 2002.

All other taxpayers will receive the benefit of the first K6000 of income being tax-free.

In 2002 the Government is giving K13 million back to taxpaying workers.

Taxes on Industry

Mr. Speaker, the private sector also gets relief, as it did in 2001. These measures are designed to encourage new investment in mining and forestry.

Mining Levy Reduction

The mining and petroleum sectors have made a significant contribution to Papua New Guinea, beyond the export earnings and taxation revenue they provide. There are substantial benefits through the creation of skilled jobs, the boost to local industries and the provision of health, education and other services in their areas of operation.

The Government has already done much to encourage these sectors in the form of more competitive taxation arrangements and the guarantee of fiscal stability.

As promised last year, the 2002 Budget reduces the mining levy. The levy will be eliminated over the next four years and this has been legislated in the budget.

This will improve the viability of existing projects, ensuring that they continue to operate despite low world prices. It will extend the life of our established mines by allowing them to mine low-grade ores that would be left in the ground if the levy remained.

The cost to the Government is K24 million in 2002.


Mr Speaker, the forestry sector will also be given some tax relief.

This year the Government commissioned an independent review of the forestry revenue system and I am pleased to announce several measures in line with its interim report.

Plantation logs will be exempt from log export tax, and there will be an across-the-board reduction of the export tax on all logs by five percentage points. The average impact of these changes is a reduction of log export tax of approximately 14 per cent.

The cost of the reduced taxes on forestry is K13.6 million.

Mr Speaker, the Government is committed to maintaining the independent log export monitoring and surveillance service in 2002 and will extend its mandate to cover the export of wood products.

Economic Reform Program

Mr Speaker, the personal and business relief that this Budget brings is a result not only of good governance. It is also the direct result of our own Economic Reform Program.

The hard work that has been done on reform over the past two and a half years has been necessary to lay a foundation for development. Between now and the end of this Parliament, the people of Papua New Guinea will see real fruit from these efforts.


I explained to the Parliament in July that the Government is committed to the privatisation program, because of the boost it will provide to development.

One of the most important benefits of privatisation will be the strengthening of the integrity of our institutions by ending one of the main breeding grounds of corruption, through which a small number of individuals have enriched themselves.

Privatisation removes what are essential parts of our economic infrastructure from direct political influence. The success of this policy can be measured by the turnaround in the fortunes of the National Provident Fund.

In essence, Mr Speaker, the Fund has been privatised. The rescue package that the Government devised, in conjunction with the removal of political influence, the restoration of probity, the rebuilding of the management processes and the outsourcing of critical functions, has restored the prospect of secure retirement to the Fund's 60,000 members.

The invasive political interference that created the disaster at NPF has been a root cause of the virtual bankruptcy of many other essential public institutions.

Several of the government-owned businesses that provide essential services have been making development harder, by not providing the services that are needed for development. These services will be made available more reliably by the private sector. The Government will require the privatised services to meet their obligations to the community. We are establishing a regulatory framework to ensure reasonable pricing of services.

PNGBC is set to be sold by the end of this year. The bids have been received and Cabinet will make a decision once the evaluation process has been completed. The 2002 Budget legislates for the subsidies involved in the community service obligations for all banks, although it will be PNGBC that will be the major recipient.

The Government will also introduce legislation in this session to ensure enforcement of the community service obligations. For PNGBC, these include no closure of any PNGBC branch or agency for 3 years.

Over the next six months there will be announcements of the way in which each of our government-owned businesses will operate in the private sector, away from arbitrary government interference. Work on these issues is advanced for the Harbours Board, Telikom, Air Niugini, Post PNG and MVIL.

It is Government policy to minimise redundancies resulting from privatisation. Where there are job losses, retrenchment packages will be fully funded and retraining offered.

Papua New Guineans will be encouraged to purchase shares in the privatised businesses at a discount.

In the longer term, services will improve, prices will not rise as rapidly as they would without privatisation, businesses will grow and there will be more jobs.

As I said earlier, privatisation also frees up financial resources for development, for education, for health, for agricultural development, for infrastructure.

Debt Reduction

Mr Speaker, one of the biggest budgetary costs is debt service.

In 2002, my Government plans net foreign debt repayment of K39 million and net domestic debt repayment of K83 million. Domestic borrowings have been set at K394 million, and repayment at K448 million.

The rewards to the nation of reducing debt and replacing high-cost domestic debt with cheaper overseas debt are clear. Reduction of debt leads to savings on interest costs, which free up resources to be spent on other priorities. In 2002 interest payments are estimated at K411 million, compared with K437 million this year.

Good Governance

The Government is making satisfactory headway with other segments of the Economic Reform Program, making many reforms to improve good governance.

One of the most important was the passage of the political integrity and stability bill, our greatest legacy for our children and a key general policy linked to more specific reform.

Additional work to improve governance has included the strengthening of the superannuation and insurance sectors, and of institutions such as the Bank of Papua New Guinea, the Ombudsman Commission, the Auditor-General and the Parliamentary Public Accounts Committee.

Mr Speaker, this Budget will take that further. New initiatives include institutional strengthening in the National Statistics Office, the National Executive Council Secretariat, and to the Central Supply and Tenders Board.

Public Sector Reform and Review of National-Provincial Financial Relations

The recommendations of the completed functional and expenditure reviews of Government departments will be implemented during 2002 and further reviews will be undertaken.

Mr Speaker, the positive impact of the Economic Reform Program has made it possible to start to fund the rebuilding of the Papua New Guinea Defence Force. An extra K37 million has been gifted by the Australian Government, on top of the budgeted aid program, to meet the costs of the first phase of the rebuilding of the Force. Successful implementation of this first phase will allow the Government to consider phase 2 in January next year.

Without the Economic Reform Program, there would have been no extra money to finance this very important rebuilding of the Defence Force.

The expenditure reviews as well as the ongoing difficulties with the Provincial Grants indicate that current National, Provincial and Local Level Government financial obligations under the Organic Law are unrealistic and unsustainable. These financial arrangements threaten the future fiscal stability of the nation.

My Government is determined to take hard decisions to address these issues in 2002 and K87 million has been allocated for these purposes.

Of this, K50 million is earmarked for the retrenchment program; K19 million for the public service improvement program; K8 million to complete and implement recommendations of functional and expenditure reviews, competition and regulatory reviews and the superannuation task force; K7.6 million for integrated human resource management and payroll project; and K2 million for review of National, Provincial and Local Level Government fiscal relations.

External Support for Economic Reform Program

Mr Speaker, my Government has successfully completed four reviews under the Stand-By Arrangement with the International Monetary Fund. This is a remarkable achievement given that many countries abandon similar programs after the first or second reviews.

Under the program with the World Bank, the first tranche of US$35 million was drawn down last year; the floating tranche of US$20 million was drawn down this year, and we expect to draw down the second tranche of US$ 35 million before the end of this year. The second tranche will trigger the release of a further US$25 million from the Japanese Bank for International Cooperation.

The next phase of our reform agenda focuses on public service reform. This will be supported by the Asian Development Bank to the amount of $US70 million. The first tranche of $US35 million is expected before the end of 2001 and the balance in 2002.


Mr Speaker, this is a responsible Budget. It entrenches the gains of my Government's sound policies and sound economic management. In addition, to the extent possible at this stage, it begins to share some of those gains with the community.

We have given K89 million to subsidise the cost of primary and secondary education. We have given K13 million to taxpayers. We have reduced the mining levy by K24 million. We have reduced taxes on forestry by K13.6 million. We have given K40 million to agriculture and farmers.

At the same time we have given great emphasis to public sector reform and to our perennial problems of implementation, particularly regarding capital works.

The gains we are able to share in this Budget have come from two and a half years of hard work at economic reform, and from sacrifice. The stage is now set for growth and development to take place.

In July next year, I shall introduce a Supplementary Budget, which will capture the further gains we will make in the first half of the year, and share them with all Papua New Guineans.

This, of course, will only happen if my Government is returned to power. I urge you to exercise your choice in the 2002 National Election with wisdom and care.

The 2002 Budget is responsible and fair. I commend it to the House.

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